For the pharmaceutical industry global free trade could finally become a reality as the World Trade Organisation Doha round draws to a close
Could a final deal in the World Trade Organisation's seven-year-old Doha Development Round lead to the elimination of most import duties on drugs and medicines traded worldwide?
With the round drawing to a close, the pharmaceutical industry might start to consider it a possibility - especially since it is the ambition of two special sectoral negotiations within the round's market access for non-agricultural products (or NAMA) talks.
One of these negotiations is the "open access to enhanced healthcare (pharmaceuticals and medical devices)" and the other is for "chemical products", which could well be written into a complete Doha deal. These would be non-universal deals because unlike general WTO agreements - such as its Anti-Dumping Agreement on how to frame special protective tariffs - members do not have to sign up. They can opt into their terms or remain outside.
Nonetheless, Doha negotiators are building on two similar special agreements that emerged from the Uruguay Round of the General Agreement on Tariffs and Trade (GATT). This round led to the launch of the WTO in 1995. One was a formal sectoral deal on pharmaceuticals, precursors and other materials used by the medicines industry, which was also a zero-for-zero duty deal.
It was and is important, especially because it was signed by the US, the EU, Canada, Japan, Norway, Switzerland, and later on by Macao, Albania, Armenia, Estonia, the Kyrgyz Republic, Ukraine, Moldova and Oman.
The richer of these members dominate the WTO, but crucially, they do not include the large emerging market countries - notably China, India and Brazil - that are critical in today's global markets. They also do not include Australia, Argentina, Saudi Arabia, and some other important richer countries.
CTH Agreement
Meanwhile, the Uruguay Round also spawned a broader chemical products sectoral deal, known as the Chemicals Tariff Harmonisation Agreement (CTHA). This agreement included some countries that have not signed up to this pharmaceuticals sectoral agreement and covers medicines, inks and fine chemicals used in medical packaging that are not covered by the Uruguay pharmaceutical agreement.
With respect to medicines and their precursors, however, it was not a zero-for-zero duty agreement. Instead, some products were to carry a 5.5% duty, some 6.5%, and others were rated at duty free. For those countries that had signed the pharmaceuticals sector agreement, this agreement was irrelevant when it came to medicines. This is because under the WTO's key Most Favoured Nation principle, all member states have to be offered the most liberal trade access a member is prepared to offer a WTO trade partner. So if a country accepts zero duty for importing aspirin under the pharmaceutical deal, it cannot say it wants to apply the chemical agreement's 5.5% duty for certain member countries it does not much like.
But the WTO encompasses 151 member administrations. Membership is based on customs unions rather than sovereign governments, so all 27 EU countries count as one member. In this case, there were and are a lot of countries covered by this partial agreement that did not sign up to the pharma deal.
Unfortunately, the CTHA was not a formal agreement in the same way that the WTO's general GATT deal is. So there is no formal record kept at the WTO of the countries that supported it. The only way of telling is to wade through all the detailed commitments on capping duty levels that were made by members following the WTO round. This can be a laborious task indeed.
room for improvement
Recently, acceded members of the WTO have declared whether they have adopted the agreement. These countries are: Albania, Armenia, Croatia, Estonia, Macedonia, Kyrgyzia, Latvia, Moldova, Mongolia and Oman, as well as Georgia, Lithuania and Jordan, which have chosen to exclude some chemical products from their commitments.
As a result, there is a lot of room for improvement in the Doha Round's pharmaceuticals and chemicals sectoral agreement talks. These are a formal part of the NAMA negotiations, with WTO members being asked to form groups of negotiators keen to see steep reductions - or even abolition of tariffs - in certain economic sectors. The product coverage of these Doha deals is similar to the Uruguay agreements, with the chemicals deal including pharmaceuticals as well as bulk chemicals, essential oils, waxes and plastics.
There are key differences from the Uruguay Round deals, however. First, in contrast to Uruguay, negotiators are - in theory at least - supposed forge an agreement only if a critical mass of members (usually representing around 90% of world trade) ended up supporting these goals. So if they are successful, the special sectoral pharmaceutical and chemical agreements written into the final Doha deal would see a dramatic increase in the number of countries signing up - especially as regards the big emerging markets.
Second, the aim is to make these formal sectoral agreements, so that the chemical deal would be publicly available, and so easier for the industry to understand and push for any failure to comply to be tackled through the WTO's disputes procedure. And third, the explicit aim of the chemicals agreement is zero-for-zero, in contrast to the CTHA.
This is important, because it is possible - even likely - under the rather arcane way the WTO works, that some members will sign up for a Doha chemical deal and not a pharmaceutical deal. If they do, that does not matter because if a Doha chemicals agreement is zero-for-zero, they both would mean duty-free drugs.
It is not yet clear whether enough members will support the complete worldwide liberalisation of the trade in pharmaceutical and chemical products, but that is what is on the table and there are grounds for optimism. The free trade option is being pushed by some big beasts in the industrialised world: Canada, Norway, Singapore, Switzerland and Taiwan, while being co-ordinated by the biggest beast of all - the US.
A paper released by these players underlined their commitment to succeed: "Chemicals are inputs into products across a broad range of sectors," it said. "High tariffs on chemicals translate into costs that significantly raise the prices of intermediate and finished goods."
If there is success in the Doha pharmaceutical agreement negotiations and a near-universal zero-for-zero agreement is struck covering most, if not all, pharmaceutical products and their precursors, then a paper released by the US, Switzerland and Singapore has suggested guidelines on how countries that did not embrace the Uruguay agreement might get rid of their tariffs.
For donated pharmaceutical aid, duties would disappear immediately. For traded medicines, duties might be eliminated in a two-step process. Also, if some countries insist on vestigial duties as a price of getting a broadly free trade pharmaceutical deal, then tariffs could be reduced by stages to an agreed harmonised rate.
product coverage
Another issue - albeit of less importance - is product coverage. The existing Uruguay pharmaceutical agreement has been expanded three times to take in more drugs, precursors and pharmaceutical industry materials, but there are still a number of products and ingredients that are excluded, especially new products and precursors being developed through innovation. We can expect that list to be expanded from the current product register maintained by the WTO secretariat.
Meanwhile, a new chemicals agreement would continue to cover other crucial inputs such as plastics, polymers and printing inks used for packaging (although under Uruguay, where they are used for the pharmaceuticals they can be covered by the specific medicines deal).
Meanwhile, there are other materials used by the industry that would be covered by different sectoral agreements. A good example is paper and board. Under the Doha talks, this would be covered by a hoped-for agreement on forest products - where interested members (led by Canada) want to "seek expansion of product coverage to pulp and paper products" over and above the existing Uruguay round deal. Here too, negotiators are looking to secure a zero-for-zero deal and need supporting members covering 90% of world trade to go ahead.
special agreements
If any of these special agreements fail, however, then WTO members would fall back on their commitments under existing Uruguay round sectoral deals. And while that might sound like bad news, all would not be lost, because for those countries who never signed up to these special agreements anyway, pharmaceuticals would still be covered by the general industrial goods tariff reduction agreement that is being discussed.
And there has been real and tangible progress on this subject, which is the cornerstone of the NAMA talks. Diplomats and trade officials are currently debating what is likely to be the last formal separate draft agreement (called modalities in WTO jargon) for these negotiations, which have been staged in parallel with trade negotiations on food and drink, services and other general trade issues.
This paper, issued in February by NAMA chairperson Don Stephenson, Canada's ambassador to the WTO, is a very full and comprehensive document and gives the pharmaceutical industry a clear idea of what may happen at the end of the round.
"A lot of the architecture for the various modalities are agreed or close enough that I would risk proposing them. That's real progress," he told a press conference at the WTO's Geneva headquarters upon releasing the document. Work is still required on the numeric formula for reducing all industrial goods tariffs but a consensus is emerging. Under the mathematical model within the paper, industrial goods tariffs would be cut across the board so that the largest existing tariffs are cut by the most, with smaller reductions for existing lower tariffs.
Stephenson said what needed to be resolved was the fact that "there is no consensus on the coefficients in the formula", which would determine exactly how steep these cuts will be. However, by looking at the numbers thus far under discussion, it is clear that there is agreement that there will be significant reductions.
So, using these figures - quoted in Stephenson's paper - the steepest cut to a 10% industrial good import duty under the formula for a developed country currently under discussion would reduce it to 4.4%; with 100% coming down to 7.4%. The weakest cut under discussion for developed countries would be 10% down to 4.7%; 100% down to 8.3%. For developing countries, the steepest would be 10% down to 6%; and 100% to 16%; while at its weakest, 10% falls to 7.7%; and 100% down to 18.7%.
Also, in a key improvement over the WTO's previous Uruguay Round, all tariffs would be cut by this formula, whereas in the earlier agreement, it was just an average reduction - allowing many tariffs to remain high, as long as other tariffs were cut deeply or removed. In this way, countries could slash duties for products they did not produce, while keeping tariffs high for goods made by protected treasured local industries.
That said, in the current round developing countries would get special rights to either reduce around 10% of their duties by a lower rate, or to allow a
limited range of existing tariffs (e.g. 5%) not to be cut or remain unbound, which in WTO-speak means make them as high as they like.
So, while the shape of these formulae has essentially been agreed, the numbers that are to be punched into them have not. And, these are the figures that will be the focus of the talks, when they move into their final unified phase, with pharma and other industrial goods concessions being traded off for those in the food, drinks and services sectors.
Talks could take place as soon as July and could be rolled into one super-negotiation where concessions in industrial goods protection are bartered for openings in the aforementioned sectors.
Of course to do this, substantial agreement must already have been secured in the broad sectoral negotiations covering agriculture, services, technical barriers to trade, and others - or these final talks would be impossibly complex.
This progress has encouraged WTO director-general Pascal Lamy to say: "As expected some areas in the negotiations will require further work. But it is clear that with the release of these revised texts we are a step closer to...finding the final balance for an ambitious and development-oriented round."
His aim is to complete all of Doha this year. Now deadlines for this round have come and gone before, with some of its summits being positively disastrous and riven with diplomatic discord. But at no time has the round made such progress. The end truly is in sight and not only may come this year, but the agreement on the main principles could come in the next few months.